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bmh12e bmh12e
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2 months ago
Suppose the interest rate that banks in Techland charge one another for overnight loans is 5 percent, the long-term nominal interest rate is 4.5 percent, and the long-term expected inflation rate is 3 percent.
a) What is the long-term expected real interest rate?
b) How will the long-term expected real interest rate be affected if the central bank of Techland starts purchasing government bonds from banks?
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Macroeconomics

Macroeconomics


Edition: 3rd
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schmienceschmience
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More solutions for this book are available here
a) The long-term expected real interest rate can be obtained by subtracting the long-term expected inflation rate from the long-term nominal interest rate. Therefore, the long-term expected real interest rate in this case is 4.5 percent ‒ 3 percent = 1.5 percent.
b) If the central bank of Techland starts purchasing government bonds from private banks, the supply of reserves will increase. This will lead to a fall in the cost of borrowing funds for private banks. As a result, they will be able to make more loans, which will lead to a decrease in the long-term nominal interest rate. If the long-term expected inflation rate remains unchanged, then the long-term expected real interest rate will fall.

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bmh12e Author
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2 months ago
You make an excellent tutor!
Brownr40
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this is exactly what I needed
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Thank you, thank you, thank you!
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